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In two interim hearings on 24 April 2015 ([2015] EWHC 1029 (Pat)) and 21 July 2015 ([2015] EWHC 2097 (Pat)) in an ongoing patent infringement and FRAND licensing dispute between Unwired Plant, Huawei and Samsung, the English Patents Court has given some useful guidance on FRAND terms in patent portfolio licences. It has also considered the phenomenon of patent privateering, and whether it amounts to a breach of European competition law.

What?

In March 2014, Unwired Planet brought claims of patent infringement in the Patents Court against Huawei, Samsung and Google. Unwired Planet's business is patent licensing. It holds a portfolio of patents related to telecommunications. Many of the patents in Unwired Planet's portfolio are declared essential to various telecommunications standards including 2G standards (such as GSM/GPRS), 3G standards (such as UMTS) and 4G standards (such as LTE)

Unwired Planet alleges that the defendants had infringed five standard essential patents (“SEP”) related to 2G, 3G and 4G wireless data technology, as well as a further non-essential patent.

FRAND terms

Unwired Planet made two open licensing proposals to the defendants, in April 2014 (the “April Proposal”) and July 2014 (the “July proposal”).

The April Proposal was for a worldwide licence under all Unwired Planet's patents, SEPs and non-SEPs. The proposal was divided into three parts, (i) cloud and server methods and equipment, (ii) mobile devices and (iii) infrastructure. For mobile devices, the proposed royalty rate was US $0.75 per major market end user device and US $0.50 per other end user device. For infrastructure the proposed royalty rate was 0.45% of infrastructure revenue. A 20% prepayment discount was also offered.

The July proposal was for a worldwide licence under Unwired Planet's SEPs only. The cloud and server aspect was not applicable in that case. The proposed royalty for mobile devices was 0.2% of Average Selling Price (ASP) for multi mode LTE end user devices and 0.1% of ASP for other end user devices. For infrastructure the proposed royalty rate was 0.2% of revenue for LTE based infrastructure and 0.1% for other standards.

Huawei has argued that neither proposal is compliant with Unwired Planet’s FRAND undertaking to the European Telecommunications Standards Institute “ETSI”, on the following grounds:

Both offers demand a royalty for acts and/or territories and/or standards in respect of which the claimant does not even claim to enjoy any relevant patent protection. That can never be acceptable;

The April Proposal bundles non-SEPs together with SEPs;

Both offers bundle all telecommunications standards together;

The April and July Proposals both fail to offer a FRAND rate for the five alleged SEPs in suit and each of them separately;

The April and July Proposals both bundle all territories of the world together; and

The April and July Proposals both fail to stipulate: (1) the full list of patents in respect of which a licence was being proposed; (2) which of those patents were said to be essential and to which standard; (3) in which territory or territories each patent was in force; (4) the term of each of those patents; (5) how the proposed royalty fee had been calculated (including whether it had been calculated on the assumption that all of the patents within the scope of the licence proposal were valid and infringed, or on some other assumption); or (6) why each offer was said to be FRAND.

The April Proposal was made on the basis that “the parties will complete a licence arrangement before June 30, 2014” otherwise the claimant “will require reimbursement of attorney fees and costs, as well as 8% interest…”.

The April and July Proposals both state that “standard terms and conditions …. including assignment and subsidiary coverage” are “to be agreed”. The April and July Proposals were not therefore offers capable of acceptance, rather merely invitations to commence negotiations.

Huawei argued that Unwired Plant had no real prospect of demonstrating that the April Proposal or July Proposal complied with its FRAND obligation. It requested summary judgment on this issue.

The Court did not accept this. It held that, in light of the developing law on FRAND licensing terms, Unwired Planet had a real prospect of success in demonstrating that its offers complied with its FRAND obligation, despite the issues identified by Huawei. It therefore dismissed the application for summary judgment.

Patent privateering

Most of Unwired Planet’s patents were acquired from Ericsson pursuant to an agreement called the Master Sale Agreement (MSA) dated 10th January 2013. The MSA transferred 2185 patents to Unwired Planet and includes terms in which Ericsson shares in the revenue earned by Unwired Planet from licensing the patents.

Ericsson is a major innovator in the mobile telecommunications sector investing about $5 billion per annum (15% of its net sales) in R&D. It holds a portfolio of over 37,000 patents with roughly 2,000 new patents being granted each year. It sells telecommunications equipment and software in over 180 countries. It does not make mobile handsets.

Samsung and Huawei relied on various competition law defences, in addition to disputing validity, essentiality and infringement. In particular, Samsung alleged that the Ericsson had breached Article 101 of the Treaty on the Functioning of the EU (“TFEU”), as an agreement which divided Ericsson’s portfolio whilst allowing Ericsson to share in the revenue earned by Unwired Plant from the transferred patents had the object or effect of preventing or distorting competition.

Samsung commented in this regards that Ericsson competed in the downstream market with potential licensees such as Samsung and was therefore open to and indeed probably needed cross-licences from those competitors. This strongly influenced its licensing approach. Also as a major R&D organisation, manufacturer and seller, its commercial reputation is a matter of importance. On the other hand, as an NPE, Unwired Planet is in a different position. It is simply seeking to monetise the patents it holds. It can act aggressively, threaten and sue putative licensees with no adverse consequences, reputational or otherwise. It has no products and so is not interested in cross-licences

Samsung also complained that certain of the specific terms of the MSA also amounted to a breach of Article 101. Clause 3.4 of the MSA sets a minimum payment to Ericsson by Unwired Planet in respect of a licence granted to a third party by Unwired Planet under a patent transferred to Unwired Planet. The clause sets a minimum percentage of the net sales revenue of the third party, which must be paid by Unwired Planet to Ericsson. This minimum percentage is payable regardless of whatever royalty rate has been agreed between Unwired Planet and the third party (e.g. if the minimum percentage was 50% and Unwired Planet had agreed a licence based on a royalty of 25% of net sales revenue, then for every £1 sold by the licensee, Unwired Planet would be paid 25p but would still have to pay Ericsson 50p). Samsung argued that this was a form of horizontal price fixing and as such was a hard core restraint on competition.

Ericsson intervened in the proceedings to apply to strike out these allegations. The Court dismissed the application, concluding that these allegations were arguable and should be allowed to proceed to trial.

So what?

The detailed consideration by the Court of the terms of the April Proposal and July Proposal gives helpful practical guidance for parties negotiating FRAND licences on how to comply with their obligations.

Moreover, this is one of the first English disputes in which the phenomenon of patent privateering has been considered. As such, it will be closely scrutinised by SEP owners and unlicensed implementers alike for any leverage which can be deployed in licence negotiations.

The English Court has described the dispute as “complex and multi-faceted”. As a matter of case management, it has therefore allocated the case to a docketed judge. This means that the same judge (Birss J) will hear all applications and trials in the dispute.

The court has divided the case into five technical trials each approximately two months apart with the first in October 2015 and the last in July 2016. In addition, a “non-technical” trial is scheduled for 13 weeks starting in October 2016. This will cover matters of fair, reasonable, and non-discriminatory (“FRAND”) licensing, competition law, obligations under the IPR policy of the European Telecommunications Standards Institute, and whether injunctions may be granted in the event of infringement of a SEP.

This is litigation on a grand scale. Further developments in the dispute will be followed closely by the whole TMT sector and judgment in the non-technical trial is eagerly awaited.

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